Tax Deductions and Exemptions-  The tax law provides a standard deduction for those who don’t claim itemized deductions. For 2013 the standard deduction increases to $6,100 ($12,200 for married filing jointly), up from $5,950 ($11,900 for married couples) in 2012.

The personal exemption rose as well, to $3,900 in 2013, up from $3,800 in 2012.  There is a limitation on the itemized deductions and personal exemptions for taxpayers with incomes of $250,000 or more ($300,000 for married couples filing jointly).

The maximum Earned Income Tax Credit is also up: in 2013 a couple filing jointly with three or more children can nab a credit as high as $6,044, up from $5,891 in 2012.

Tax Rates-  As inflation drives wages up, the amount of wages taxed may be less. In tax year 2013, for each of the marginal tax rates - 10, 15, 25, 28, 33 and 35 percent – you will continue to see a reduction in the amount you’re taxed since income limits taxed at lower tax rates were increased.  In 2013 individuals were also given a tax break because Alternative Minimum Tax income limits increased allowing less taxpayers to be subject to this additional tax.  Income above $51,900 ($80,800, for married couples filing jointly) may be subject to the Alternative Minimum Tax, up from $50,600 ($78,750 for married couples filing jointly) in 2013.

There are some changes for high-income taxpayers in 2013. A new tax rate of 39.6 percent has been added for taxpayers whose income exceeds $400,000 ($450,000 if married filing jointly).

Gifts – Gifts you give over a certain amount must be disclosed to the IRS by filing a gift tax return. For years, gifts under $10,000 were exempt, and that’s the amount many people remember. But in actuality the exclusion amount has been going up for a number of years. In 2009 through 2012 it was $13,000, but beginning in 2013 you can gift anyone up to $14,000 a year without filing a gift tax return.

Retirement plans -  If you contribute to a 401(k) or other voluntary salary reduction plan such as a 403(b) or a TSA, in 2013 you’ll be able to contribute up to $17,500 to the plan, up from $17,000 in 2012. If you are 50 or older you can contribute an additional $5,500, for a total contribution of $23,000.

If you are self-employed and have a SEP IRA, for 2013 you can sock away 25% of your gross income, up to $51,000 of retirement contributions. That’s $1000 more than last year.

IRA contributions are also on the rise. You can contribute up to $5,500 a year to your IRA (that was $5,000 last year), plus an extra $1000 if you are at least 50. To contribute the full amount to a Roth IRA, your income  must be $188,000 or less if you are married filing jointly ($127,000 for singles), up from $183,000 in 2012.

Remembering these IRS inflation adjustments will help you plan throughout the year and save at tax time.

Standard Deduction vs. Itemized

What Is a Standard Deduction?

The standard deduction is a fixed dollar amount that can be subtracted from your Adjustable Gross Income (AGI) to reduce the amount of taxes you owe. The specific amount is set every year by the IRS and is usually adjusted for inflation. Which of the standard deductions you can take is determined by your filing status, such as Single or Married Filing Jointly. Taking the standard deduction precludes you from itemizing any of your deductions.

What Is an Itemized Deduction?

Itemized deductions are expenses that fall under a long list of IRS allowable categories. Some of these categories are dental and medical expenses, home mortgage interest, charitable contributions, business use of a home or car and deductible taxes. You must have paid these expenses for yourself or for one of your dependents, such as your spouse or child. Additionally, you must be able to document these expenses with receipts.  You don’t need to know what these deductions are.  TurboTax will easily guide you through itemized deductions.

How Do I Choose?

Itemizing will usually be the way to go if you had large non-reimbursed dental and medical expenses or if you had interest expense on a mortgage, paid property taxes, had large employee business expenses that were not reimbursed by your employer, had major uninsured casualty losses or made large contributions to charities, but TurboTax will make the appropriate choice for you based on your entries for these expenses.

When You Don’t Have a Choice

There are times the choice will be made for you. You cannot use the standard deduction if you are a non-resident alien. If you are married filing separately, and your spouse chooses the standard deduction, you cannot itemize. If you do not have the necessary records for itemizing, then you have use the standard deduction. If you qualify to file Form 1040EZ or 1040A, you cannot itemize, though you may be able to claim certain exemptions and credits.

Both types of deductions are very important because they are a way to reduce your taxable income. While it is may take some time to gather receipts for itemized deductions, you might find it a worthwhile effort as you try to make your taxable income as low as you legally can.

Interactive by joshritchie

Embed the above image on your site using the code below:<a href="<a href="http://intuitturbotax.files.wordpress.com/2012/02/standard-deduction-personal-exemption-infographic.png"><img" rel="nofollow" target="_blank">http://intuitturbotax.files.wordpress.com/2012/02/standard-deduction-personal-exemption-infographic.png"><img</a> src="<a href="http://intuitturbotax.files.wordpress.com/2012/02/standard-deduction-personal-exemption-infographic.png&quot" rel="nofollow" target="_blank">http://intuitturbotax.files.wordpress.com/2012/02/standard-deduction-personal-exemption-infographic.png&quot</a>; alt="standard deductions personal exemptions" title="standard deductions personal exemptions" width="620" height="1877" class="alignnone size-full wp-image-8428" /></a><br/>Free Tax Filing, Efile Taxes, Income Tax Returns - <a href="<a href="http://www.turbotax.com">TurboTax.com</a&gt" rel="nofollow" target="_blank">http://www.turbotax.com">TurboTax.com</a&gt</a>;

Don’t assume because these numbers seem so high that you may not exceed them. Better to take the time to review the things you can deduct and start the old adding machine. Let’s go through the items you may be able to take on your Schedule A:

• Mortgage points - Points are considered prepaid interest as their purpose is to buy down the rate charged on your loan. You can deduct these in full on the purchase of a home if the mortgage is a million dollars or less. If greater than a million, it must be scaled back as will the interest deducted. Note: Points paid for a refinance are not deducted all at once but are taken over the term of the loan, a fraction each year.
• Mortgage interest - Interest on your mortgage is deductible up to the first million dollars of debt owed. Further, interest on up to $100,000 of a Home Equity Liner of Credit (HELOC) is also deductible.
• Property tax - The real estate tax you pay on your home, car, and boat are all deductible.
• For those who live in a co-op, a building in which you own your apartment, but there’s a common area and perhaps, an underlying mortgage, the association should give you a statement each year documenting how much of your monthly fee was for property tax and mortgage interest. Don’t miss these.
• Investment interest - Is deductible limited to your net investment income.
• Student loan interest - is not subject to itemizing, you may take this deduction right on form 1040.
• State income taxes/State sales tax - you may deduct one or the other, which ever is greater for you. If you are in a state with a low income tax, it may be easy for your sales tax to be higher than your local income tax especially in a year when you are furnishing a home or buying a new car.
• Charitable contributions - Cash contributions are the simplest to document. You cut a check or charge the donation, and the charity acknowledges it in writing. If you benefit in any way (book, CD, T-Shirt, tote bag, etc) the charity should tell you the value of the item and it comes off the amount you may deduct. If you donate non-cash property valued over $500, you must fill out a form 8283 to document the donation. If you have long term stock gains, those shares are a candidate for donation. You get to deduct the value on the day the donation is made, and avoid the capital gain on the profit if you were to sell.
• Medical and dental expenses - You can deduct medical and dental expenses as part of your itemized deductions, but only the amount that exceeds 7.5% of your adjusted gross income. Doctors include chiropractors, psychiatrists, psychologists, as well as the traditional MDs and surgeons. Prescription drugs, weight loss programs prescribed by a doctor, and items such as false teeth, eye glasses, and contact lenses are included. Note that you can only deduct the cost of expenses for which you weren’t reimbursed.
• Casualty losses - I discussed this at length last year with all the flooding in the news. You are allowed to take a deduction for losses due to flood, fire, or theft, subject to a $100 deduction, and then only to the extend it exceeds 10% of your adjusted gross income.
• Business expenses - There are a number of items that fall into this category. Use of your home – you must maintain an area exclusive to your business and nothing else. It must be your principal place of business (i.e. your employer, if any, does not have a office for your use. The home office can’t just be for your convenience.) Form 8829 is used to determine the deduction you are allowed. Similarly, the use of your car for business purposes may be deducted. If the car is not used exclusively for business you must keep a contemporaneous accounting of your business miles and deduct only the business portion. If you are reimbursed by your employer for the business use, you don’t report the reimbursement, nor do you take a deduction. Costs incurred while traveling on business are deductible. These include Cost of airfare, meals, lodging, tips, dry cleaning, laundry, and cost of calls made. These expenses are all reported on for 2106 which calculates the amount that flows on to the schedule A.

A long list, I know, but whatever tax bracket you are in, the taxes you save by itemizing can add up fast. If this article helped you uncover some hidden deductions, please let me know by commenting below.